Economic policy implications of world demographic change

Demographic changes over the next 50 years will affect the worldeconomy in many ways. Some of these effects will be benefi-cial. In developing countries, for example, falling birthrates will enable women to supply more paid labor and families to invest more in the education of each child. Other demographic changes will cause economic problems. In developed countries, population aging is likely to imply government pension systems cannot continue with their current rules. Population growth in developing countries could also change patterns of world trade and thereby reduce the wages of some workers in developed countries. Economists have argued that policy changes are needed to maximize the rewards of some demographic changes and reduce the negative impacts of others. For example, governments of developing countries may need to create more flexible labor markets if their increased female workforce is to find employment. The governments of many developed countries need to plan how much they will support the high number of retirees expected in the future and communicate this plan to workers. Richard Johnson was formerly an economist at the Federal Reserve Bank of Kansas City. The article is on the bank’s website at www.kc.frb.org. 39 This article describes aspects of predicted world demographic changes that are likely to pose challenges for economic policy and explores how policy could react to these changes. The first section sum-marizes a forecast of world demographic changes up to 2050. The second section discusses the economic effects of demographic changes in developing countries, and the third section considers such effects in developed countries. The fourth section examines the effects of demo-graphic changes on world trade and capital flows. The article concludes that the economic effects of such changes will depend heavily on future government policy. In particular, the effect of population growth in developing countries will depend on whether their governments ’ policies encourage economic growth. Government policy in developed countries will affect the size and distribution of problems created by population aging but will not be able to remove these problems altogether.